Tax Due Diligence in M&A Transactions

Tax due diligence is an important aspect of M&A that is often overlooked. Because the IRS cannot effectively conduct an audit of each company in the United States, mistakes or oversights during the M&A process could lead to severe penalties. A well-planned and meticulously documented process can assist you in avoiding these penalties.

Tax due diligence generally refers to the review of previous tax returns as well as informational filings from current as well as past years. The scope of the audit is dependent on the type of transaction. For example, entity acquisitions typically involve greater potential exposure than asset purchases, due to the fact that taxable targets may be subject to joint and several liability for the taxes of all corporations participating. Other factors include whether or not a tax-exempt entity has been included in the Federal tax returns consolidated and the amount of documentation related to transfer pricing for intercompany transactions.

Reviewing prior tax years can help determine if the company is complying with regulatory requirements, as well as some red flags indicating possible tax evasion. These red flags include, but aren’t the only ones:

Interviews with top management personnel are the final step in tax due diligence. These interviews are designed to answer any questions the buyer might have and clarify any issues allywifismart.com that might have an impact on the deal. This is especially crucial when purchasing companies with complex structure or uncertain tax positions.